2012 (10) TMI 1203 - AT - Companies Law

Summary

Issues Involved:
1. Violation of regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (FUTP Regulations).
2. Imposition of restraint orders and monetary penalties on the appellants.
3. Examination of the role and responsibility of directors in approving financial statements.

Summary:

1. Violation of FUTP Regulations:
The Securities and Exchange Board of India (SEBI) conducted an investigation into the financial results of Pyramid Saimira Theatre Ltd. for the financial year 2007-08. The investigation revealed that the company's financial reports contained inflated figures of revenue, profits, security deposits, and receivables. This manipulation led to a rise in the company's stock price, which the promoters used to pledge their shares and raise substantial funds. The appellants, who were directors of the company, were found guilty of violating regulations 3 and 4 of the FUTP Regulations by publishing false and misleading financial results.

2. Imposition of Restraint Orders and Monetary Penalties:
The whole time member of SEBI, acting u/s 19 read with sections 11 and 11B of the SEBI Act, 1992, restrained Shri N. Narayanan and Shri V. Natarajan from dealing in securities for two and three years respectively and from being directors of any listed company. Shri K. Natarahjan, Shri K.S. Kashiraman, and Shri G. Ramakrishanan were restrained from being independent directors or members of audit committees of any listed company for two years. Additionally, monetary penalties were imposed: Rs. 50 lacs on Shri N. Narayanan, Rs. 40 lacs each on Shri K. Natarahjan and Shri K.S. Kashiraman, and Rs. 25 lacs on Shri G. Ramakrishanan.

3. Examination of the Role and Responsibility of Directors:
The appellants argued they were not involved in the day-to-day management of the company and relied on audited financial statements approved by the chief financial officer and auditors. However, the Tribunal emphasized that directors have a duty of care and diligence. A director cannot merely depend on the integrity and expertise of others but must exercise independent judgment and scrutiny. The Tribunal noted that Shri N. Narayanan, as a whole-time director, had significant responsibilities, including financial and banking matters, and could not claim ignorance of financial irregularities. Similarly, the independent directors, being members of the audit committee, were expected to exercise oversight and ensure the accuracy of financial statements.

The Tribunal referred to case laws highlighting the evolving responsibilities of directors and concluded that the appellants failed to fulfill their statutory duties. The provisions of section 12A of the SEBI Act and regulation 2(c) of the FUTP Regulations were found to be applicable, as the appellants employed devices to defraud investors. The Tribunal upheld the impugned orders, dismissing the appeals and affirming the penalties and restraint orders imposed on the appellants.